By Professor Edward J. Janger (Brooklyn Law School)
Professor Edward J. Janger
This Essay considers the role of bankruptcy law in the legal ecosystem that regulates banks and other financial intermediaries. It uses the recent spate of bank and crypto intermediary failures to consider the role of bankruptcy courts (and other resolution institutions) in protecting the stability of the financial system when the instability of a financial intermediary threatens to spread contagion throughout the financial system. It expands the definition of bankruptcy to comprise the various regimes for resolving the debts of financial intermediaries. In so doing, it seeks to identify the common themes that operate (and should operate symmetrically) across those resolution regimes.
The recent failures of Silicon Valley Bank, First Republic, and Signature Bank, along with the melting down of various crypto-intermediaries like Celsius and FTX teach two lessons. First, while the Dodd-Frank legislation requirements of resolution planning may create a workable architecture for regulating the safety and soundness of financial intermediaries and governing their resolution, the architecture was not used because none of the entities that failed were within its scope. In a previous article, I warned that the decision to limit the scope of the Dodd-Frank reforms to so-called “too big to fail” institutions was a mistake – that forest fires can be started by campfires as well as large explosions.1 Accordingly, it argued for a functional approach to financial institution failure. This Essay argues for a regulatory regime that considers financial intermediaries of all shapes and sizes and manages systemic risk across the financial system. It then seeks to instantiate that approach, at least with regard to the resolution of failed institutions (“bankruptcy”), and develops a set of princples for allocating the value of failed institutions. It develops three concepts – “equitable realization,” “constitutive priority” and “fiat priority” – that together instantiate an affirmative and complementary role for bankruptcy courts in the regulation of financial intermediaries that I call “constitutive equity.” These principles seek to balance the imperatives of financial system stability, value preservation, and fair treatment of competing stakeholders.
Click here to read the full article, which was recently published in the Yale Journal on Regulation.
- Edward J. Janger, Baby Lehman: A Functional Approach to non-SIFI Resolution, 27 Norton J. Bankr. L. & Prac. 591. ↩︎